Cash vs digital: Rethinking India’s payment narrative

Ultimately, the success of India’s payment system should not be measured by the disappearance of cash. A resilient system expands choice and builds trust

With the government reducing its incentive allocation for low-value UPI payments to ₹1,500 crore for 2024-25 — less than half of the previous year’s outlay — and a series of outages briefly disrupting the system, India’s digital payments infrastructure is once again in the spotlight. These developments underscore how integral UPI has become to everyday transactions — and how much the system is relied upon to function smoothly, at scale.

Interoperability — not substitution — must be the goal

The rapid rise of digital payments often reinforces the belief that India is steadily moving toward a cashless future. But the picture on the ground is more layered. While digital transactions have surged in recent years, this growth has not come at the expense of cash. Currency in circulation has more than doubled from ₹13.35 lakh crore in March 2017 to ₹35.15 lakh crore in March 2024 and still accounts for nearly 12% of GDP —comparable to pre-demonetisation levels. ATM withdrawals, too, remain substantial, holding steady at around ₹33 trillion annually since 2018-19.

This continued reliance on cash stands alongside the explosive rise of digital payments: UPI alone processed over 131 billion transactions worth ₹181 trillion in 2023-24, up from just 6.9 billion in 2017-18. The data points to a rebalancing. Digital systems have absorbed most of the new transaction growth — expanding the frontier by reaching new users, geographies, and enabling new kinds of transactions. Yet cash continues to serve a wide range of everyday needs, especially where trust, access, and infrastructure remain barriers to going fully digital. India’s payment story is not one of replacement but of coexistence — marked by continuity as much as change.

This is not an India-only phenomenon. Globally, cash and digital payments continue to coexist in layered ways. In China, often seen as a leader in digital finance, cash in circulation still accounts for around 9% of GDP, only slightly lower than a decade ago. In Japan, a country with high technological capacity and banking penetration, cash use remains remarkably high, accounting for over 20% of GDP — a reflection of cultural preference and institutional trust in physical currency. Even in the US, cash’s share of GDP has remained stable around 8%. Financial innovation rarely leads to full substitution; more often, it reshapes usage while layering new systems on top of old ones.

In India, the continued use of cash is shaped by a mix of behavioural preferences, regulatory concerns, and infrastructural gaps. Among small and informal businesses, digital transactions are often approached with caution due to concerns about regulatory exposure. While policies like zero MDR are designed to encourage digital adoption by reducing transaction costs, they don’t fully address apprehensions related to compliance. For instance, understanding when GST registration becomes mandatory, and navigating requirements like e-invoicing and return filings may seem daunting without accessible guidance. In the absence of clear, easily navigable compliance frameworks, many small enterprises find cash transactions to be a more straightforward option.

For many individuals — particularly those who earn informally or do not earn enough to actively use banking services — cash remains familiar, private, and easy to manage. It offers a sense of control and immediacy that aligns with their financial habits and needs. While digital payments provide speed and convenience, concerns around fraud, transaction failures, or unfamiliarity with the system can still deter adoption — especially among first-time users or those with limited digital experience.

Much of the policy push behind digital payments is driven by the belief that they can support economic formalisation — by increasing transparency and creating traceable records. This is a compelling vision, and digital payments can certainly enable greater visibility into economic activity. But visibility alone does not lead to formalisation. Without trust in institutions, clarity in compliance processes, and safeguards for users, digital transactions may not translate into stronger links with the formal economy. Formalisation requires more than infrastructure — it depends on how systems are experienced, understood, and trusted.

India’s progress in building digital public infrastructure is undeniable. UPI has transformed real-time payments. But digital rails must be complemented by systems that enable people to use them reliably. That includes investing in grievance redressal, financial literacy, and the cash-in, cash-out (CICO) infrastructure — which enables people to convert digital money into physical cash and vice versa. This becomes especially important in rural and underserved areas, where financial realities often demand flexibility across both physical and digital modes of payment.

Aadhaar Enabled Payment System (AEPS), for example, has expanded access to basic banking services in remote areas through biometric authentication. Yet gaps in CICO infrastructure persist. Access to ATMs, business correspondents, and physical cash points remains uneven — and continues to shape how people engage with the payments system.

Ultimately, the success of India’s payment system should not be measured by the disappearance of cash. A resilient system expands choice and builds trust. Interoperability — not substitution — must be the goal. In a country as large and economically layered as India, people must be free to choose what’s practical and familiar. There’s nothing inherently virtuous about cash, nor inherently superior about digital — both serve different needs. India’s financial future lies not in eliminating cash, but in integrating it into a system that values inclusion above all else.

Nikita Kwatra is principal, Artha Global, a Mumbai-based policy consulting organisation. Nitika Narayan, consultant at Artha Global, contributed to this article. The views expressed are personal